In this article we will be looking at central bank statements. We will also look at how you can make money from them consistently.
This will give you the skill of interpreting what central banks are thinking and saying. You will find it much easier to identify trading opportunities.
We will be looking at the following topics:
- Pre-scheduled central bank statements
- Preparing for scheduled statements
- Unscheduled comments from board members
Retail traders often struggle with the concept of central banks statements. They can seem boring and complicated.
If you understand what to look for then these events can be a gold mine of trading opportunities. A central bank statement can be any words spoken by central bank board members in any scenario.
This includes pre-planned statements, speeches by individuals and unscheduled answers to audience questions.
We will be looking at all three types of statement throughout this post.
You also need to understand how the market operates. Traders will always have an expectation around each statement.
The big moves occur when the comments do not match with what traders were expecting to hear. This could be a surprise announcement or a slip of the tongue by a board member.
This concept can be turned into a trading strategy in itself. You will need reliable news sources but it is possible to take advantage of these moves over and over again.
Pre-planned Statements From The Bank
Each central bank schedules a series of statements each year. These statements help the market anticipate future policy decisions.
If the market is taken by surprise then it creates huge volatility and uncertainty. This can be illustrated by looking at the 2015 SNB policy shock.
The Swiss National Bank decided to remove its currency floor on the EURCHF pair. The result was total market chaos.
The price of the pair fell over 30% within minutes of the shock announcement. This led to brokers and hedge funds closing down overnight.
This behaviour drew widespread criticism from the market for the confusion it caused.
To avoid such chaos most central banks aim to communicate clearly with the market. They do this by releasing their statement schedules at the beginning of each year.
In 2018, the Federal Reserve in the US scheduled eight statements. This pattern of eight statements per year is followed by most major banks around the world.
This includes both the Bank of England and the ECB who are two of the world’s most important central banks.
The only major bank to schedule more than eight statements was the RBA in Australia, with eleven. Two major banks scheduled less than eight.
These were the RBNZ with seven and the SNB with four.
In 2014, economist Danielle Kedan conducted a research study into central bank communication. She found that clearer communication improves the impact of each policy.
Each bank can hit their targets more easily if they communicate clearly with the market.
This explains why central banks have improved their processes over recent years. This all helps the bank be taken seriously whenever it hints at future policy changes.
Making Money From Scheduled Events
The minutes are a record of what the bank discussed during its most recent meeting. It also provides guidance to the market about the outcome of that meeting.
The press conference allows financial journalists to explore the minutes further. They ask questions and the bank governor answers them.
The whole idea of pre-planned events is to avoid volatility. This means that most of the time the markets will not react too much to what the bank says.
The key to making money lies in identifying new shifts in central bank policy that the market didn’t see coming.
This information will be contained within the minutes that the bank release. Very often you will find slight changes to future monetary policy.
Each time there is a change, the markets will react and the change will become priced in. If you react quickly enough you can position yourself to ride that move and profit from it.
If you’re new to trading these events then preparation is critical. It is not enough to watch the event unfold.
You need to know exactly what scenario you’re looking for even before the statement is released. When you see it you can react quickly.
To help you with this process we will walk through it step by step.
Preparing For A Central Bank Statement
Most economic calendars will have the dates of the meeting scheduled well in advance.
There are several online resources that you can check for upcoming release dates too. Preparation should begin around one week prior to the event.
The first step is to research what various analysts have to say. They will be carefully analysing what they think the central bank will do based on the recent data.
Some analysts can be very influential and their comments alone can move the markets.
These analysts are known as central bank watchers. They also have a larger influence over traders than normal.
This research shows what influential experts are anticipating from the Central Bank next.
One of the most important things to look out for is how analysts expect the bank to change their statement.
Look for a review of the most recent statement and comments. Then learn how they expect the next statement to compare.
This comparison will be the whole basis for how the markets will react at the release.
This will allow you to determine specific scenarios. These scenarios may generate particular price movements. Being ready for these moves can lead to profitable trades.
The key to making money from central bank statements lies in the expectations.
If analysts anticipate a significant change in language then the price will react. It will do so long before the actual release. If the release is different to the expectation then the price will move again in the aftermath.
The more unexpected the event the larger the price movement in reaction will be. This principle will help you avoid trying to trade comments that are already priced in.
Unscheduled Comments From Board Members
Unexpected comments are a common cause of large currency price movements.
The key to understanding when a comment is market moving is in knowing how each board member thinks.
If a hawk says something dovish then this can generate a significant market reaction. (And vice versa).
The market views this as a sign of what the wider bank board are thinking.
If the hawks are feeling dovish then the doves must definitely be feeling the same if not more strongly. This could indicate a shift towards a more dovish policy move ahead.
The markets gauge these comments and position themselves as early as possible.
Very often such comments are given during press conferences and may even be taken out of context. The impact is usually short term.
Despite this, there are still opportunities to ride the short term price moves.
This is a common day trading strategy used by professional traders. Uncharacteristic comments do not happen often. When they do it is almost certain to cause a short term move.
Most board member speeches are found on professional economic calendars. Market moving comments are also broadcast by audio squawk services for financial traders.
These type of sources specialise in getting you market moving information fast. They also eliminate the need for you to personally monitor news wires.
How To Make Money From Central Bank Statements
In this article we have looked at how you can make money from central bank statements
The key to making money from them is to prepare for each statement and follow a wide range of analyst opinion.
You should have a clear expectation for trading opportunities before the event unfolds. The more unexpected the statement is the larger the moves will be.
If you have any questions about this topic please write it in the comments below. We read each one and reply to as many as possible.